Review of the U.S Hog Market - May 2002

Our Monthly look at the trends in US Hog Market and what effect thes may have on future prices; Hog Prices Collapse; low Expansion In U.S.; Canadian Production Still Increasing; Larger Slaughter Than In 2001; Trade Picture; Pork Exports Starting To Weaken; Cold Storage Stocks Are A Problem; Price Trends; Futures Based Cash Price Forecasts - Written by James Mintert, Kansas State University.
calendar icon 3 May 2002
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Hog Prices Collapse

Barrow and gilt prices collapsed, counterseasonally, during April. The last week of April, estimated barrow and gilt prices in the Iowa-S. Minnesota market averaged near $47 per cwt. (carcass weight, including estimated carcass premiums), 31% below a year ago.

The decline in the pork cutout value has been almost as severe as the decline in hog prices, averaging 28% below a year ago during April.

Although pork production was larger than last year during April, the 5% increase in average daily pork production was small compared to the price decline. The magnitude of the price decline implies that, in the short run, pork demand declined sharply, partly in response to pressure from large supplies of both beef and chicken.

Slow Expansion In U.S.

USDA’s March Hogs and Pigs report indicates that only modest herd expansion is underway in the U.S. The March 1 U.S. breeding herd was virtually unchanged compared to last year. December-February farrowings were up 3%, but farrowing intentions for both spring and summer were only 1% larger than last year. The U.S. breeding herd and farrowing estimates, combined with a small productivity increase, imply modest year-to-year slaughter increases during the rest of 2002. However, U.S. hog slaughter is comprised not only of pigs born in the U.S., but also of hogs imported from Canada, primarily as feeder pigs.

But Canadian Production Still Increasing

Hog production in Canada increased dramatically in recent years. For example, sow farrowings rose about 30% from 1998 to 2002. And as Canadian hog production increased, a growing percentage of Canadian pigs were shipped to the U.S. as feeder pigs for finishing in the U.S. From 1995 to 2001, hog imports from Canada to the U.S. tripled, reaching 5.34 million head during 2001. Fifty-nine percent of U.S. hog imports during 2001 were feeder pigs. According to Statistics Canada, hog inventories are still growing rapidly in Canada, which means that live hog shipments to the U.S., especially feeder pigs, will continue to grow. As a result, U.S. commercial hog slaughter this year will be larger than U.S. pig crop estimates suggest.

USDA indicates that live hog imports from Canada during January-February of this year rose nearly 197,000 head (25%) above last year. The vast majority of the increase (91%) in hog imports was feeder pigs shipped primarily into the North Central Corn Belt for finishing. Hogs shipped to the U.S. as feeder pigs will add to the U.S. supply of slaughter hogs as virtually all of these hogs will be slaughtered and processed in the U.S.

Although Canada’s hog sector is growing rapidly, it is still much smaller than the U.S. industry. For example, Canada’s first quarter 2002 pig crop was about one-fourth the size of the U.S. pig crop. Keep this in mind when examining increases in Canadian pig crops. Last fall, the Canadian pig crop increased about 780 thousand head (11%) compared to fall 2000. During the January-March quarter, the Canadian pig crop increased 598 thousand head (8%) compared to 2001. And Canadian pork producers plan to increase spring quarter farrowings by 11% compared to last year. As a result, the trend of much larger shipments of Canadian feeder pigs to grower/finishers in the U.S. will likely continue the rest of this year.

Larger Slaughter Than In 2001

The combination of a slightly smaller U.S. pig crop last fall and the large increase in the Canadian pig crop means that spring quarter slaughter is likely to rise about 2 to 3% above last year’s. Weights are likely to remain about 1% heavier than last year which means pork production will average 3 to 4% above 2001’s. Although average daily slaughter during April was about 3% above a year ago, slaughter during the last half of April was 5 to 6% larger than last year which generated concerns that spring quarter hog slaughter could be larger than expected based on pig crop estimates. It’s too soon to tell whether the recent run-up in slaughter is attributable to an underestimate of the pig crop or simply a short-run aberration.

Combining estimates of first quarter Canadian and U.S. pig crops implies that slaughter this summer could rise about 4 to 5% above summer 2001’s. Again, heavier weights mean that pork production this summer will rise 5 to perhaps as much as 6% above a year ago.

Fall quarter slaughter will also be larger than last year, possibly by about 3 percent, which would push fall quarter U.S. hog slaughter up over 27 million head. Slaughter at that level could tax U.S. hog processing capacity again, leading to wider than normal spreads between wholesale pork and hog prices.

Trade Picture

Exports have become a significant component of total demand for U.S. beef, pork and poultry. During 2001 beef exports totaled 2.27 billion pounds, equivalent to 8.7% of U.S. commercial beef production. Also during 2001, pork exports totaled 1.56 billion pounds, equivalent to 8.2% of U.S pork production and total broiler exports were 6.5 billion pounds, equivalent to 20.5% of U.S. chicken production. Given the magnitude of the these trade volumes relative to U.S. production, it’s clear that disruptions in trade flows can have a big impact on U.S. domestic supplies and, as a result, prices.

To date, USDA has only released 2002 trade data covering January and February. As a result, we don’t know exactly how much impact Russia’s ban on U.S. poultry imports had on March and April trade volumes, not only on chicken exports to Russia, but on exports of chicken and other meat products to other U.S. meat importers. However, the January-February trade data is still revealing.

Although U.S. beef and pork exports held up reasonably well during January-February 2002 (total beef exports up 0.4% and pork exports up 3.5%, compared to 2001), broiler exports were 16% smaller than last year. In particular, broiler exports to Hong Kong, which is the second largest market for U.S. broilers, were down 41% vs. 2001. Exports to Japan and Singapore were also down sharply compared to the prior year. The fact that chicken exports were running well below last year’s pace prior to the Russian import ban is an indication that lifting the ban on exports to Russia will help alleviate our poultry supply problems, but will not by itself solve the problem. As a result, low priced chicken will continue to present strong competition for both pork and beef in supermarket meat cases.

Pork Exports Starting To Weaken

Pork exports showed signs of weakening during February. Total pork exports during February declined 3.6% compared to a year ago. Among major U.S. pork customers, the biggest decline occurred in Mexico, where imports of U.S. pork declined 23% compared to last year. Exports to Japan also declined modestly from the previous year (-2.5%), suggesting that pork export gains associated with Japan’s BSE crisis are starting to wane.

Still, pork exports to Japan are likely to hold up reasonably well since Japan’s Safeguard tariff ended in late March. Finally, total pork exports the next several months could weaken because U.S. pork exports last winter and spring benefited from the FMD crisis in Europe.

Cold Storage Stocks Are A Problem

Total stocks of meat in cold storage skyrocketed this winter. Some of the increase in domestic supplies was not actually marketed to U.S. consumers, but instead was put into cold storage. Pork cold storage stocks at the end of March hit 528 million pounds, 22% larger than last year.

Cold storage stocks of beef were also quite large, reaching 413 million pounds at the end of March, 24% more than in 2001. And, not surprisingly given the ban on exports to Russia, poultry stocks also grew dramatically, climbing 22% above a year ago. The large cold storage stocks will tend to hold down prices this spring and summer as processors attempt to work stock levels down before fall.

Price Trends

Cash prices during the first quarter of 2002 declined modestly compared to last year. The first quarter Iowa-S. Minnesota barrow and gilt price estimated price average, including carcass premiums, was about $53.65 per cwt. (carcass weight), down just 5.4% from 2001’s average. But prices actually began to collapse prior to the end of the first quarter and by late March were 23% below a year ago. The downturn continued during April as cash prices the last week of April averaged near $47 per cwt., 31% below a year ago.

Iowa- S. Minnesota barrow and gilt prices during spring 2001 averaged $70 per cwt. Despite the fact that pork supplies are only expected to be about 3 to 4% larger than a year ago, it now looks like spring 2002 prices will be dramatically lower, declining counterseasonally from winter to spring and average near $50 per cwt. (carcass weight), a year-to-year decline of about 30%.

What happens this summer will largely be dependent on how strong pork demand turns out to be. Assuming chicken exports pick up significantly over the next several months, prices could rebound somewhat from this spring and average in the low $50’s per cwt., about 25% below summer 2001.

Fall quarter prices will depend not only on pork demand, but also on how severely slaughter this fall taxes processing capacity. Assuming slaughter capacity is not a big problem this fall, cash prices are expected to average in the low $40’s per cwt., about 15% below the prior year. However, if slaughter winds up being large enough to test industry capacity, carcass weight cash prices could easily dip well into the $30’s.

Futures Based Cash Price Forecasts

Futures prices, adjusted for basis expectations, are a source of continuously updated cash price forecasts. As an example, Western Corn Belt 51-52% lean barrow and gilt price forecasts based upon futures prices at the time of this writing (5/01/02) settlement prices) adjusted for basis expectations are included in a graphical format. Basis forecasts are based upon the most recent three-year average basis for 51- 52% lean barrows and gilts. To provide some indication of the amount of risk present, forecasts based upon the most positive and negative basis of the last three years are also included.

Weekly updates (in graphical form) of these price forecasts are also available on the K-State Livestock & Meat Marketing Web Site ( in the weekly electronic publication entitled Hog Price & Supply Graphs.

Information provided by KSU Livestock report. For more information visit the KSU Livestock website.
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